October 21, 2018

5 Steps for Fixing Your Cash Flow Problem

Cash flow is the pulse of any business. Get cash flow right and the enterprise is set for growth and prosperity. Get it wrong, however, and tragedy inevitably follows.

Managing any small business’ cash flow is incredibly frustrating and stressful. There are employees to pay and creditors to keep happy. Mostly, ensuring you have cash on hand to pay your debts as and when they fall due comes down to taking a disciplined approach and putting in place a few simple precautions.

Diagnosing Cash Flow Woes

If you find yourself faced with a cash flow problem, the first thing you need to do is ask a simple question. What triggered your cash flow problem?

Understanding the underlying problem is fundamental to identifying what course of corrective action you need to take.

Left uncorrected, your cash flow issue could transform into accumulated debt, a rather more pernicious problem.

Identifying Cash Flow Issues

Here are three key sources of systemic cash flow problems:

  1. Sales Issues

If cash flow is going to struggle. Sales issues can generally be traced back to one of three problems: (1) your price is too high, (2) the marketplace isn’t excited about your product or service, or (3) your sales and marketing is not resonating with the right audience.

The sooner you address your lack of sales, the quicker you can implement a solution.

  1. Inflated Expense Loads

If your top line number looks healthy, the next area to examine is your expense load. If revenues are buoyant yet cash flow is tight, something is happening after sales are booked. Your expense sheet should show you where your money is going.

Every business needs to periodically address its expenses rather than waiting until your budget is in a bind.

  1. Poor Collections

Your sales may be strong and expenses low, yet you’re still suffering cash flow related issues. If this happens to you, take a look at your account receivables. It may be poor collections that are dragging your business down. Failing to collect on a sale actually puts you in a worse position than if you never made the sale.

Don’t assume unpaid invoices are normal. While you can’t prevent late payments entirely, you shouldn’t accept them as a normal cost of doing business.

5 Steps For Fixing Your Cash Flow Problem

  1. Eliminate Unnecessary Expenditure

Cut out all those expenses that chip away at your hard-earned revenue. If you don’t need it, you shouldn’t be paying for it. Don’t assume you need something just because it’s the conventional approach. What about your office size? Have your vendors sold you an unnecessary product or service upgrade? Don’t feel bad about making cuts to re-balance your budget.

  1. Squirrel Away A Cash Reserve

Being paid late and bad debts happen. If you have a have a cash reserve tucked away you can rely on it can a lifeline for the business. You’ll sleep better at night knowing you’re covered against an unanticipated cash shortage.

  1. Don’t Keep Extra Inventory On Hand

Most small businesses are adopting just-in-time replenishment. Excess inventory sucks up liquidity. It also represents a risk that you can’t move it. Inventory management can take the pressure off your cash flow. If you do find yourself with extra inventory, put it on sale or discount it to move it off your shelves and into your revenue line.

  1. Let Your Accounting Software Track Your Cash Flow

If you’re still keeping track of your cash flow and expenses manually, it’s no wonder you find yourself struggling with cash flow. There are many inexpensive accounting software packages and outsourcing options you can adopt, which will track cash flow, provide you with live cash flow projections and avoid those last minute panics. Wave Accounting is a good option that’s also free.

  1. Negotiate With Your Creditors

While your cash flow problems might have many causes, how you manage your creditors may be another area to explore. Look at your current trading terms and look to secure more favourable ones. Negotiating better input prices from your suppliers, extending their payment terms; even changing your utility supplier can transform your cash flow.

Final Observation

Temporary cash flow problems are part and parcel of doing business. Every business has weeks where they’re forced to shuffle money around, delay expenses, or restructure deals. However, if you find weeks drifting into months, you know you have a problem on your hands. The worst thing you can do when faced with a cash flow problem is to procrastinate. The earlier you act and the more proactive you are, the more positive cash flow transformation will be.

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Filed Under: Business Advisory, Culture, Optimising Processes

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